1. The next few days will likely see an avalanche of analyses of the economic effects of the corona virus. Here are a few points, building on a previous thread. Basic point: Anti virus measures aim at the core of economic organization, the division of labor.
2. We have to assume that we shall see repeated and localized pockets of infection around the world for some time to come (maybe until vaccines come on line). These in turn will lead to quarantines, border closures, and disruption of economic relations.
3. Because the remedies are extreme, even small risks of infection and of death can have a drastic effect on economic activity.
From a macro viewpoint, it is an unusual supply shock. What can policy do?
From a macro viewpoint, it is an unusual supply shock. What can policy do?
4. Fiscal policy cannot increase production where the source is firm closures or supply chain disruptions. But it can help fund the means to fight the epidemic, be it health measures, hiring health personnel, helping suppliers of medical equipment.
5. If panic leads to a large decrease in demand, a fiscal expansion may be able, if not to get output back to its previous level, at least to maintain higher output.
6. In the same way, monetary policy can help sustain demand. But it can help the financial sector help firms in trouble, either because of low sales or supply disruptions.
Bottom line: Even if the death cost is limited, the economic cost may be large.
Bottom line: Even if the death cost is limited, the economic cost may be large.
